Harte Hanks, Inc.

Robert Munden - General Counsel Karen Puckett - CEO Doug Shepard - CFO

Michael Kupinski - Noble Financial

Thank you, operator. Our call will include forward-looking statements, such as statements about our strategies, adjustments to our cost structure, financial outlook and capital resources, competitive factors, business and industry expectations, anticipated effects of acquisitions, litigation and regulatory changes, economic forecasts for the markets we serve and other statements that are not historical facts.

Actual results may differ materially from those projected or implied in these statements because of various risks and uncertainties, including those described in our most recent Form 10-K and other filings with the SEC and in the cautionary statement in today's earnings release. Our call may also reference non-GAAP financial measures.

Please refer to today's earnings release for the required reconciliations and other related disclosures. Our earnings release is available on the Investors tab of our web site at hartehanks.com.

I'll now turn the call back over to our new CEO, Karen Puckett.

Thank you, Robert and good afternoon, everyone. Thank you for joining us on our earnings call.

I am very pleased to have joined Harte Hanks as CEO and I am excited about the opportunity to speak with you today and in the future. By now you've had a chance to review our third quarter results and a full earnings release we issued earlier today.

We deliver core operating revenues of $122 million compared to $134 million in the third quarter of 2014. Consistent with the expectations we shared with you last quarter, the rate of revenue decline improved compared to the second quarter of 2015.

Doug will walk you through the financials in more detail in a moment, but I would like to spend my time discussing my observations from my first month and half as CEO of Harte Hanks and elaborate on our areas of focus going forward. As a member of the Harte Hanks Board for the past six years, I am familiar with our business and I support the strategic vision we announced last year to become a leader in smarter customer interactions.

Our overall business strategy remains unchanged. We will continue to leverage our existing strength, coupled with an acquisition strategy that will augment our capabilities to meet the needs of both existing and potential clients.

Living from a Board member to the CEO role has given me more opportunities to engage with our talented employee base. We have smart traders and loyal people who bring knowledge and expertise across our business practices in all industries we serve.

I am very pleased to be leading such a great team and I am focused on employee engagement, improving collaboration and creating opportunities for development. Delivering on our vision to be a leader in smarter customer interaction will position us well in today's rapid changing marketplace.

Customer engagement is emerging as a new growth sector with the proliferation of devices, digital touch point and data source, introduce new marketing complexity. Brands will be challenged to meet the expectations of our customers and drive revenue growth.

As suggested Forrester Research, we are in the age of customer engagement agency. The race is on for digital capabilities, data insight and seamless multi channel communication.

With digital destruction, consumers have more control than ever before. Brands need sophisticated tools and advanced analytics and higher levels of expertise to engage customers across small tool channels and devices.

Clients need marketing partners who are agile, understand how to optimize the way the tool and technology and drive sophisticated data insights to fuel meaningful interaction. Harte Hanks is positioned in this market place to be a leader and innovated force.

We've demonstrated our ability to provide operational excellence across complex multichannel programs and we continue to expand our digital platform by acquiring best in class talent and capabilities. As we innovate and evolve our expertise and data analytics, multichannel services we will remain in a strong position in the market and provide a competitive advantage to our clients.

In addition to my own observation, I have heard direct feedback from our clients around the strong efforts our employees are contributing towards helping them achieve their goals. Let me share some of these examples of some of the excesses we're having with our customers.

In this quarter we added a new entertainment client who choose Harte Hanks to offer multichannel customer support for the launch of its newest award winning product. Our customer experience support team work side by side with members of the client team to develop and improve customer support through data analytics, data insights and training.

We also have a new tech logo wins supporting the client demand generation program across Europe, Middle East and Africa. Our relationship started with Data Analytics and agency created services, which will enable the execution of a multichannel program to provide product education, promotions and qualified sales fleet.

We will begin delivering of these services before year end and with existing clients a leading beauty care client came to us needing ideas to maximize the results of the upcoming holiday shopping season which of course is central part of their business year. We develop an approach to identify targeted customers, a unique social campaign and special offers to drive incremental business.

In fact they plan to acquire holiday program ideas across their marketing plan for 2016. We're excited about the potential additional opportunities to provide campaign strategy and execution in addition to the already data analytics, data strategy and marketing database support that we provide today.

In addition we’re also pleased to share our win for Silver -- that for a Silver 2015 International Echo Award in IT category for our consumer social campaign hash tag, Know My Day, which play a big part of our global launch of Samsung, Note 4 Smartphone. DMA Echo Awards recognize that premier achievement in data driven marketing by the most strategic and creative talent.

This was a huge win for our Harte Hanks creative services team it demonstrates that we offer our client highly engaged in modern creativity. I want to personally congratulate our team also on that win at the bottom.

While these client examples we've illustrated how a solid foundation in place, it is clear from our third quarter results that there is still much work to be done. Our main priority is not only returning the company to profitable revenue growth, but also to strategically position ourselves to capitalize on the large opportunity that is in front of us.

Our clients and prospects need tools, events, analytics and higher levels of expertise to engage customers across multi channels and devices. I believe this present growth opportunity for Harte Hanks.

With these goals in mind however, we're focused on three near term key areas. Number one stemming revenue churn by improving customer satisfaction.

Number two, enhancing our go-to-market strategy to drive awareness of our capabilities and highlight Harte Hanks as a leader in smarter customer interaction and number three focus on innovation to deliver impactful market leading products that better connect our clients and our customers. Let me walk through the steps we are taking to achieve each one of these areas now beginning with stemming revenue churn while our new global sales in the first nine months of year have been very strong these new wins were not enough to offset the losses we incurred from existing clients.

We have a long track record of strong relationship with our customer and are committed to ad enhance our trusted partner. As I had stated -- as I've started to visit with our customers, I’ve learned just how much our key customers depend on our services and how strongly they believe in what we do for them.

Despite with there are elements of our account management and delivery that we need to strengthen. Our team is focused on levering Harte Hanks data expertise along with the client services.

In client services we want to prove in a couple of areas around quality and accountability and commitment. We realize we must deliver the solutions we've agreed upon with the client on the agreed timeframe and insert client satisfaction of these solution.

We must also restore our position as a trusted partner and top leader to our customers and designing and implementing go to market strategy for the rapidly involving role with multichannel marketing. We will achieve this by the introduction of new and innovative capabilities through internal development and acquisition.

Our secondary focus is enhancing our go to market strategy and that messaging to position Harte Hanks as the leader in smarter, customer interactions and drive awareness of platform. Last week we made an important step in strengthening our go to market capabilities and announce the appointment Frank Grillo as our Chief Marketing Officer.

Frank is a marketing leader with more than 25 years of experience leading companies of all sizes. Most recently Frank led the enterprise marketing at CenturyLink.

He brings a successful track record of helping guide organizations through periods of significant change, innovation and disruption in the marketplace. In addition Frank is a data driven marketing leader and has expensive expertise in defying customer segmentation to identify the most optimal areas for success in the market an area we have some previously success and needed to leverage further to achieve our goals.

Another key area of growth opportunity for us exist in the mid market space. Customers of this size are needing to rapidly enhance our existing marketing practices to take advantage of a multichannel customer contact strategy.

They need strong partners who can help them build a data analytics to understand the customer’s behavior and translate that understanding into the optimal tactic to most effectively reach customers. We believe Harte Hanks proposed capabilities make us the ideal partner to these customers expanding into mid market space will be a key area of focus as we enter 2016.

In addition, innovation is a major priority for us by broadening the strength in our data interactive capabilities we can deliver more effective market leading products that better connect our clients with customers. With that in mind, you should expect us to continue to invest in this area going forward and we have recently made some exiting solution announcements.

Total customer discovery and data refinery are examples of our commitment to lead and provide innovative solutions in today’s market place. These are two new cutting edge solutions for gathering, synthesizing and leveraging customer data in ways never available before.

To target customers on a personal level you must first to able to identify them as individuals. Total customer discovery tracks behavior and identifies customers across digital devices and social platforms ensuring the consistency as messages across multiple channels.

Total customer discovery allows clients to interact with customers in a more meaningful ways improving campaign performance based on real time insight and connect digital activity to offline sales to target customers each phase of the buying journey both online and offline. Digital channel proliferation has driven exponential increase in available data and the number of sources solution can be obtained.

Our data refinery platform is a service solutions manages and enriches large volumes of data at any format across multiple sources in near real time to create in integrated comprehensive customer view. The data refinery allows client to sees an opportunity and near real-time by and choosing and social attribute.

This shortens the window between when a customer engages a customer guided to win a marketing action can be placed, reducing self cycle by increasing customer engagement. During the quarter we launched the latest version of the trillion software system products suite, which contains several enhancement and new products.

We planned to launch trillion sales force to the market in fourth quarter, this would be our first product targeted at the sales force CRM market place and as in line with our strategy to expand our capability to around data quality solutions or CRM. Our product roadmap for trillium is build upon key tenants leveraging and build upon the brand equity we have developed as a market leader for data quality solutions delivery greater value to customers by extending the capability we provide to include data governance and data preparation and accelerate our scales of business by capitalizing on high growth market trends of Big Datam, Self Service in Cloud.

Innovation comes organically better of comes through acquisition which is an integral piece of our business strategy. As you will remember, we acquired 3Q in March to extend our digital capabilities.

They are still what to do leverage their office across Huawei but the reception of broader platform has in very good. So we will focus on our joint sales showcase our full suite of product portfolio to our customers.

And as we can see there is a lot to be excited about our Harte Hanks' that also lot of work to be done. Looking forward I believe that we have the right strategy in place to return to profitable revenue growth, position ourselves for future growth opportunities and establish ourselves as a leader in smarter customer interaction.

I appreciate your continued support at Harte Hanks' and returning value to shareholders remains our ultimate goal. Now let me turn the call over to Doug to walk through our third quarter results.

Doug.

Thank you, Karen and good evening. The quarter included two significant events.

First Karen is appointed as our CEO in early September. Second during the third quarter as a result of sustained declining of market capitalization below the book value of our equity and recent operating performance of the company, we had a trigger event for goodwill impairment.

As a result we've performed an analysis to estimate the fair value of each of our reporting segments. Based on our analysis, the fair value of trillion segment was estimated to be more than book value of its equity requiring no goodwill impairment charge for it.

We have estimated share value for our customer interaction segment to be less than the book value of its equity and consequently determine that we should take a $209 million goodwill impairment charge for this segment. This is of course a non-cash charge based off of future projections that are heavily influenced by recent performance and does not impact how we operate our business.

Most of our goodwill balance accumulated from business acquisitions made in the late 90s. Also, we have now owned 3Q Digital for two quarter and they continue to outperform both the search market and out anticipated revenue growth.

3Q is driving strong results and we're starting to experience growth in social marketing with changes for clients looking for assistance in using data to place and target social sites such as Facebook. 3Q's reputation is helping us to grow our sales pipeline resulting in more deals and is a part of Harte Hanks' their average deal size is now larger than historically seeking in 3Q.

Turning to our third quarter results, our consolidated revenues were $122 million compared to $134.1 million of revenues in the same quarter last year. Customer interaction revenue declined 6.3% after adjusting for the sale of our B2B research businesses in early April.

Let me walk through the results of this business by industry vertical. Our healthcare vertical declined with a client database win and a contact center win for support services for a pharmaceutical company offset by loss of creative work for healthcare and pharmaceutical companies.

Our select markets in retail verticals declined from clients reducing mail volumes and database clients not renewing business with us. Our financial vertical is impacted by loss of a mail client in our agency services client offset by the win of a new client announced last year using our solutions for analytics, database, creative and mail services.

Our auto and consumer vertical is influenced by the loss of a large luxury automated factor consolidating its work amongst vendors and reductions in work from mail clients. Turning to Trillium, Trillium Software's revenues increased 1.1% to $13.2 million compared to $13 million in the third quarter of 2014 driven by increased software licenses and software as a service revenue.

Software and service continues to grow as a part of Trillium's revenue mix. We formerly introduced our SaaS offering earlier this year allowing us to eventually have more predictable revenue and replace single lumpiness on license software sales.

Also our SaaS offering gives us access to new clients in markets by allowing us to be more competitive in the mid market area. We expect our SaaS revenues to continue to grow during 2016 as move to existing customers SaaS arrangements over license agreements.

To drive this result we are investing in mid market direct sales team and are expanding our reseller partner channel. The full breadth of the Trillium product portfolio will be available to our mid market customers with particular focus on profiling, sharing data quality and soft service solutions.

Moving down the income statement, adjusted operating income which excludes $209.9 million in goodwill impairment and $3.1 million in CEO transition charges was $7.6 million compared to $10.5 million with the same quarter of last year. Reductions in labor and production cost were offset by an increase in selling, general and administrative cost and lower revenues.

Trailing software operating income increased to $3.5 million compared to $3.3 million in the same period last year. Operating margins increased to 26.6% from 25.4% during the quarter due to strong expense management.

Operating income benefitted from increases in software licensing and software as a service revenue as well as lower payroll cost offset by increased consulting expense. Customer interactions operating income adjusted for the previously mentioned charges was $4.5 compared to $7.6 million in the same period last year.

Reductions in labor expense from lower headcounts, outsourced cost and facility related expenses were offset by an increase in sales and marketing expense related to employment of additional sales force personal. Our expense management has continued to be strong in its revenue decline.

In the last 12 to 18 months we've reduced headcounts from several facilities, reorganized our operating structure after our strategy implementation, offshore parts of our technology development staffing and sold our B2B research businesses. These actions have allowed us to maintain our operating income during the period of revenue decline.

Our third quarter effective tax rate was 41.5% which was higher than our 38.7% in the third quarter of 2014. The increase in the effective tax rate is primarily due to the impact of non-deductable interest associated with the 3Q digital worn out.

As a result third quarter 2015 adjusted diluted earnings per share was $0.08 excluding the goodwill impairment and CEO transition charges compared to $0.10 for the same quarter 2014. While our revenue performance during the quarter was disappointing we are pleased that our expense management allowed us to maintain solid earnings per share performance compared to this time last year.

In addition Trillium's operated margins have grown both during the quarter and for the full year. Moving to the balance sheet, our net debt balance remains low to approximately $51.2 million.

We currently have $73 million available under our revolver excluding letters of credit, in addition to our cash balance of approximately $24.7 million at the end of the quarter. For the third quarter, we generated $4 million in free cash flow inclusive of spending $2.4 million of capital expenditures.

Our third quarter capital expenditures were primarily related to Trillium Software. Year-to-date we have generated almost $17 million in free cash flow With that operator, I’ll turn the call back over to you for questions.

Thank you. Thanks for taking the questions.

In spite of the extremely challenging quarter it seems like you guys managed to beat my numbers, which is a good thing. And so I did wanted to ask you a little bit about some of the trends in the business, particularly those that you indicated that most of it was because of the volume declines in your customer interaction business and I was wondering if you lost any clients in the quarter and as we head into the fourth quarter, are you seeing any traction in that?

Are we still anticipating the prospect of seeing a decelerate in the rate of decline in the fourth quarter as well and when do you think that you might even turn the corner towards revenue growth in the customer interaction space?

So one or two lost clients, a majority of the revenue decline from a lost client standpoint actually the bigger impact was from clients lost earlier in the year, that has also been offset by a higher amount of wins that we have gotten from clients than we have historically had in the last two or three years, which is a result of some of the new products that we have rolled out in new additional sales force emphasis that we put on sales and marketing, but we've talked about for the last several quarters. So we are and we have been seeing some successes coming out of that investment and commitment to bringing in new clients, new logos and new businesses.

So we’re glad to see the rate of decline in the third quarter to be less than what it was through the first six months of the year, obviously lower than what it was through the end of the second quarter and that's what we through we would see and we're glad to seeing that to this point.

Would you anticipate that you're going to see similar trends like that in the fourth quarter?

I don’t know but it will be as much. We primarily expect the fourth quarter to be consistent with the third quarter performance and revenues performance.

And Doug, in terms of the issues with the consolidation among our luxury European auto manufacturer to one vendor, what was that you weren't able to provide that lost that business?

That business was primarily related to them selecting a much larger agency that’s specialize solely in services to the auto industry and from a competitive standpoint that's not unusual. It was the normal bill industry specialist.

Now that you're introducing new products in Trillium, has it turned the corner towards sustainable revenue growth at this point?

Yes we believe so, we're very happy to see -- we got a couple of quarters of revenue growth behind it. There is a nice cycle as you can see of product innovation, new products rolling out and that's starting to take hold in the market place and we're starting to see some results from that.

What, could this be the time to start considering maybe selling that asset given the fact that now that if we're turning the corner toward sustainable revenue growth that maybe this gets better price for that valuable asset. I was just wondering if you give us your thoughts on that.

At this point, it’s way too early to commit or make that kind of decision. It is performing well.

We still believe that the industry that it participates in is growing faster and at higher rate than what Trillium has done for the last couple of quarters and there is a lot of potential upside in valuation and performance that both Harte Hanks and its shareholders can participate in.

It seems like the pace of acquisitions are falling a buck behind the level indicated by the company's promise to double the company's revenues. I believe it was over a five-year period at that point.

And Karen, you indicated that you plan to continue this strategy that the company outlined in terms of the acquisition growth, are there any specific areas that strategically you may tweak or reasons why may be that the company hasn't really fulfilled a much more aggressive acquisition strategy behind the 3Q investment?

No, I would answer it this way in terms of first off supportive of the strategy and coming from a World War I had to deliver quarters every quarter. The numbers I record, I understand the complexity of the environment that the marketing environment is changing so dramatically.

So the great news is it’s wonderful to be in an area where there is growth potential because anytime there is disruption and changes in opportunity and that’s really what’s happening in the marketing landscape. Saying that when we came out with the strategy and talked to all of you about that relative to capabilities and acquisition I would say that we're not going to do acquisitions because we put out number out there.

We got to do the right acquisition, which I think is what our shareholders wanted to do and furthermore I think that we've been very clear when we acquire a company that we not only know and we know the growth of that company as a standalone, but we have to have an integrated go to market capability a unified approach to the customer to the market place. So it can't be just a standalone.

We have to be able to take that capability and apply to existing customers or a new sub-segment that we have observed before. I think that’s the power of the opportunity.

If I look at -- we are continuing, we've got someone full time is focused on acquisitions in this development. Very intrigued with just data and data analytics it's foundational to what we do and we have to ensure that we have the best both capability and power around that.

I think that’s an area that we just have to drive a lot more focused and attention to. So you'll probably see more in that area.

I'm sorry. I'll ask the final question again.

I guess I give out this question asked a lot, obviously Harte Hanks has never cut its dividend over the course of its history that I recall and the yield is obviously quite extraordinary. I know the company is generating free cash flow and so forth, but in the light of the investments that are needed, acquisitions and investments into the company, do you feel that there is any prospect that the company will cut the dividend to accelerate maybe some investments into the company.

Yes, the whole of strategy with use of cash is a way discussed with the Board and we will continue to keep all of you posted, but right now we are very committed to the current strategy that we have and will continue on this.

Okay. That’s all I have, thank you.

Thanks.

Well I am going to conclude our earnings report tonight. I do appreciate the time that you have taken with us today and I think you realize through our earnings and what you heard today is that we do have some work to do, but I am very confident and excited about our future.

We have experience in loyal employees, which is very, very important and so impressed with our employee base and the loyal team and just their commitment to the company and an impressive global client list that included renowned brand names and a deep and growing product portfolio and to consistently generate significant amount of cash flow. I believe that we have a strong and effective strategy to return to profitable revenue growth, position ourselves for future opportunities and to establish ourselves as a leader in smarter customer interaction.

I look forward to updating you on our progress and we would also like to thank all of you again for your time today. I appreciate your support of Harte Hanks and we'll speak with you again soon .Good night.